Could The Markets Crash Again?

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

The Tech bubble was a stock bubble.

The 2007 bust was a housing bubble.

This next bust will be the sovereign bond bubble.

Why does this matter?

Because of the dreaded “C word” COLLATERAL.

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

The reason?

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

WHAT DOES THIS HAVE TO DO WITH TODAY?

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:

1) The Grand Monetary experiment of the last five years is ending.

2) THE Crisis (the one to which 2008 was just a warm up) is beginning.

The market might not crash this time. As long as you can print money out of nothing, the market can continue to go up in nominal terms. The problem is, that the money will loose value, eventually, faster than the market will go up.

This might be one of the options in this case, as I am of no doubt that the Japanese and the American governments are directly or indirectly actively buying stocks.

It could be the bigger banks buying for the money they receive, guided by the FED, but someone is buying to prop prices up.

So, if this is the case, the market in stocks might continue to go up, but the faith in the Dollar might evaporate. Maybe not overnight, but much faster than people can offload their fiat currencies.

The first thing that goes are the friends? As they see their economic life go down the tubes you take the blame? The louder you screech before the collapse the more you get the blame after! The kicker is after the economy normalizes your friends don't come back because your bad luck and way too smart to be freinds with after all. You see things in the future and therefor R dangerous to the good times at present and THANKS FOR THE SESSION ZH?

While it's tempting to call you an idiot, who can't read, it's like this, you jerk:

If you think a 1.243% decline is a "crash" in any market, you should really sit the fuck down, shut the fuck up and look straight afucking ahead.

Butt, seriously, a decline of less than 2% is not a crash, mi amigo. You should know this, you should do some serious re-education and training if you want to be taken even a little bit seriously on this board.

1) because the FED and its accomplices in the Primary Dealer "banks" will not permit it. You can't pay off the gradually burgeoning retirees in the pre-baby boom, and baby boomers themselves if IBM goes to 90.

The stock market prices for the most widely held quadrillions of shares, has to be maintained at current levels (a dip of 10% is nothing) or the entire world economy and the richest pension funds will suffer enormous financial hardship, relatively.

So again, no there will be no 2008 repeated before most of us have begun to mistake our Wives for Our Hats. (thank you, Dr. Sachs).

J B T MFing D!

2) My short hedge in TZA, and the finanicals, would become the equivalent of allowing Midas to turn an Idea into Megagold bars, and god would never allow me to be that happy. She's never liked me very much.

Fed raising short rates before QE ends? Nobody is asking the q. That leads to your scenerio! What happens if QE is still going when the economy shows the signs of "Needed INFLATION"? I believe that the Fed will allow short rates to rise and your hopes will exit from your foot into the HDTV screen as the pressure slowly disappears but not QE?

We already have Inflation, that's "not needed". What's needed inflation? A deflationary scenario that you think may someday rear it's head? I can't think of a single thing I bought this year that cost less than last year.

I hope to hell you aren't buying government numbers about it. Practically everyone here with any sense has cited just in the last few days how inflation is rampant already, but cleverly hidden in the form of lesser quantity of Hershey kisses in the bag, more air in the cereal boxes, and the rise in prices of Beef, Cocoa, reductions in quality of ingredients, as well as a Big Mac nearing the $5.00 mark.

Your logic assumes none of the top players in the system - central bankers, most powerful banking families, top families of the most powerful nations - will break ranks, gamble the world economy on screwing each other. Or panic, and join a race for the exit.

That's asking a lot from a bunch of ruthless sociopathic scumbags.

I know them. They were raised to look down on everyone else, to see us as lesser beings who deserve to be exploited, manipulated and used by the superior ones - them. When we're no further use, or make too much trouble, they were trained to see us as worth little more consideration than ants on the sidewalk.

Do you really think such folks are capable of the kind of unity and solidarity with each other that your scenario would require? The history of the past century would suggest otherwise.

All them excess reserves are still sitting on balance sheets not being deployed while the stock market gets the juice? The rest of the economy is doing 2% on a good quarter and is trumpeted as excellent? Its an illusion like a 50oz. Box holding 25oz? All this free money being created never reaches the real economy and therefor you are being taken in by numbers to assume a process that is not as out of control as you want or fear! If the FED lines up buyers for excess bonds and you continue to pump income into the system then you make yourself wrong 40 hrs. A week or 364 days a year and counting? Is it the size of the box you fear or that you wont get 25oz?

You bet I do and what is new since 2008 is that the FED hadn't theretofore, been giving them a trillion dollars, and then over the next 5 years $100 Billion a month, and then $85Billion a month and now $75billion a month to undergird the market, AND be a buyer of last resort.

Where in hell do you think all that cash is going?? Even here on ZH the cry has bemoaning how the FED has been screwing the shorts into ground then holding them there, and how the quadrillions have been used to buy shares at the slightest indication of a sigfnificant downturn (10% range).

And none of you are looking at pension fund redemptions and how it's possible to maintain all time highs in the midst of those liquidations.

If I were top banking family I'd be sending Bernanke, Yellen, Geithner, and Lew, as well as all the hidden members of the club a new Custome Made Rolls Royce, lifetime supplies of the most expensive and tasty treats from Le'Circe, and daily rations of every conceivable luxury on earth rather than going thru what they went thru in 2008, or in your case, breaking ranks that only harm themselves in the long run. I don't believe for one second they are given to that kind of suicidal destiny no matter how ruthless they are. And I am one of the most prolific and complaining cynics in history.

BILL GATES caused the 2000 on the courthouse steps no less. 07 was a little more detailed except THE FED DROPPED THE AIG STOCK PORTFOLIO ON THE MARKET OVER NIGHT. The Fed used the potfollio to raise cash and create a buying point. The Fed had supported the stock market more than once before bear stearn was allowed to fail? Presently China is developing along 2007 lines except its monoline insurance is handled by state and yet they are still having blowups? How much foreign money is in American stock and bonds because if they don't sell they buy?

The debacle of 2008 caused the FED and Treasury to make an unprecedented move to GUARANTEE that the Primary Dealers, the Insurance Companies---which are de facto banks, with greater latitude and less regulations as to what they can invest their premiums (in excess of Claims and highly advantageous Income Tax rules that allow them to use that cash and fudge their Reserves for Future and Past Claims any way they choose)----would never again sell out the American people particklerly the very rich who own most of the shares. They were given a pass on Grand Jury indictment and prosecution for their cooperation in maintaining the market, moving to buy up shares that are to be sold to pay off pensioners in hundreds of thousands of companies, SEPs, and other retirement liquidations.

I'll bet no significant decline, and absolutely no Crash will occur until those boomers and all the other retirees have passed away.

The shorts will be eating theirs for years, decades to come. As I have been for 5 years.

For once, it can't happen here. Not Now. Not in the near and distant future.

Even if it backs up the difference is stark? In 2008 not a single bigshot seen it. Not a one zero nada seen anything. The few who did aren't nearly as popular because of their knowledge of the past? Until younger started the begging for money tour of the White House or the committee to elect Obama did its WH luncheon nobody knew anything. Except their houses were taking severe haircuts and yet they still don't see the bank to mortgage connection? It is different this time many see the writing but say they don't read?